Should You Invest in Call Options in a Bear Market?

Bear market rallies are calling investors — namely, those buying up call options. Should you try the call options strategy in a bear market?

Rachel Curry - Author

Aug. 4 2022, Published 2:44 p.m. ET

Bear market rallies are piquing investor interest despite warnings of more tumultuous economic downturns to come. From optimistic earnings to acquisition announcements and more, some investors are looking to call options — and it’s working.

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Call options, or options contracts betting on a stock reaching a higher strike price at a specified date (the opposite of put options), could be the strategy of the year, a Goldman Sachs researcher says.

Here's how a call options strategy fits into bear market rallies.

Despite what many experts call a bear market — and what further folks say is an incoming recession — rallies are happening. The Nasdaq Composite Index jumped about 2.6 percent on Wednesday, Aug. 4 while the S&P 500 jumped about 1.5 percent. The Dow Jones Industrial Average rose 1.33 percent during the same period. This is all despite YTD downtrends between 10 percent and 20 percent for all three of these major indices.

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Naturally, call options could be a beneficial tool in an investor’s toolkit when the market favors swings over longer buy-and-hold strategies.

A Goldman Sachs researcher says to keep an eye on call options.

According to the head of Goldman Sachs’ derivatives research team Vishal Vivek, “The average stock reporting earnings so far this quarter has traded up 0.8 [percent] on their earnings day. Investors that bought calls five days ahead of each earnings report have seen +38 [percent] average return on premium so far this earnings season.”

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Vivek added, “Looking ahead, we recommend buying calls or replacing stock positions with call options ahead of the remaining earnings reports.”

The Goldman Sachs team recommends using call options at earnings time, but they may fit in more ways than just a quarterly earnings report. However, earnings season may be the most obvious time to call a strike price for a company you perceive as likely to succeed.

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According to Goldman, some stocks with upcoming earnings may be worth paying attention to for a call options strategy. These include Atlassian Corp. (TEAM), Suncor Energy Inc. (SU), Shake Shack Inc. (SHAK), IAC/Interactivecorp (IAC), and Maxar Technologies Inc. (MAXR).

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Noting stocks with upcoming earnings that have also been marked by analysts as underperforming in recent trading history could be a target for your stock market strategy.

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Risk management is important with options spreads.

In a bear market especially, it’s important to hedge your bets and practice risk management. A strategy entirely dedicated to call options may not be the most beneficial for you (because diversification means more than just having different companies in your portfolio, but also different types of assets and derivatives).

For that reason, investors may benefit from using options spreads in a bear market. An options spread (spread option) is “a type of option contract that derives its value from the difference, or spread, between the prices of two or more assets,” according to MAPSignals co-founder Lucas Downey.

What underlies a spread option is a price spread between two different prices, rather than a single price. The spread could represent different assets like commodities, or simply different time frames (calendar spreads) or grade levels (quality spreads) of that same commodity.


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